Balancing the urgency of delivering a restructuring with regulatory requirements in a regulated sector.
Restructuring a company in a regulated sector is always challenging. Navigating directors’ duties is difficult enough in an unregulated sector, but the additional layer of oversight and statutory compliance required in regulated sectors often places directors proposing a restructuring in the invidious position of balancing the interests of the company’s creditors with their wider regulatory duties.
Firms regulated by the UK Financial Conduct Authority (FCA) proposing compromises of redress claims arising from the mis-selling of loans to consumer customers have been in the spotlight in recent months. The FCA’s position in the contrasting schemes of arrangement proposed by Amigo Loans (its first scheme was rejected by the court in May 2021 following opposition from the FCA) and the Provident Financial Group (whose scheme was sanctioned in August 2021, notwithstanding a “letter of concern” from the FCA) has signalled a far more interventionist approach. It seems clear that the FCA’s previous practice of issuing a “letter of non-objection” to a firm proposing a compromise has been abandoned permanently.
In January 2022, the FCA published a consultation paper in which it outlined its general approach. This highlighted the inherent tension between the regulator’s desire to ensure “the best outcome possible for customers” and a regulated entity’s freedom under company law to compromise the heavy burden of consumer claims, either as the basis for a solvent wind-down of its business or a continuation of trading in a different form. The FCA maintains that its assessment of a scheme of arrangement or restructuring plan is “distinct from, and because of our statutory objectives necessarily broader than, the court’s assessment”. This can make its position on any given compromise difficult to predict. Indeed, it is possible to envisage a scenario in which a regulated entity’s compromise has been approved by the statutory majorities of creditors and sanctioned by the court, notwithstanding FCA opposition. In those circumstances, the consultation paper implies that the FCA would invoke its regulatory powers to prevent the firm from undertaking regulated activities (including by replacing the regulated entity’s management if that were thought necessary), thereby potentially undermining the value of proposing a compromise from the outset.
Of particular sensitivity for the FCA is the prospect of a regulated entity emerging the other side of the restructuring under its existing ownership and management, despite the potential misconduct originally giving rise to the (now compromised) consumer claims. “Phoenixing” is not a new phenomenon, nor is it confined to this particular sector. When culpable mis-selling has occurred, the FCA has disciplinary remedies at its disposal that fall short of precipitating the entity’s failure, which will usually result in a worse outcome for creditors than a compromise and part-payment of their claims. The FCA’s approach restricts the ability of a regulated entity wishing to continue its business to pursue a compromise scheme that returns anything less than full redress to affected creditors. A compromise giving a partial recovery may be the least worst outcome for creditors. The FCA wishes to ensure a “fair allocation” to redress creditors, but on one view this should be nothing more than what the court ordinarily considers in its decision whether or not to sanction a scheme or a restructuring plan.
It may be that only legislative intervention to resolve this conflict between legal compromise and regulatory compliance will provide regulated entities and their investors with sufficient comfort and clarity that, should they choose to pursue a compromise scheme or plan, their efforts will not be in vain.